5 million extra workers could get more holiday pay

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Employment Appeal Tribunal rules that non-guaranteed overtime should count towards holiday pay calculation.

Businesses may have to set aside large sums of money to cater for underpaid holiday pay according to a ruling today (4 November 2014). The Employment Appeal Tribunal (EAT) has ruled in the combined cases of Bear Scotland Ltd v Fulton and Baxter; Hertel (UK) Ltd v Wood and others and Amec Group Limited v Law and others that overtime which is not guaranteed by employers but which employees are required to work if it is offered, should be included in the calculation of holiday pay in accordance with the Working Time Regulations 1998 (based on the Working Time Directive).

Matthew Smith, an employment lawyer and partner with law firm Blake Morgan explains: “This is a significant ruling that has potentially far-reaching implications for employers, who may now have to set aside large sums of money to cater for underpaid holiday pay.

“A  key question  was  how far back claims by underpaid workers could go with some debate  that if there has been a series of deductions, some claims could go back as far as 1998, the date when the UK Working Time Regulations were introduced. However, one significant aspect of this case is the suggestion that, if the series of deductions has been punctuated by a gap of more than 3 months, the passage of time will have broken any series of underpayments. In other words, a break of more than 3 months between one period of an employee’s holiday and the next might be enough to break a series of underpayments.

“The Government estimates that one sixth of the 30.8 million people in work get paid overtime. That means that around five million workers could be entitled to more holiday pay.

“This ruling does not necessarily mean that it is the end of the matter. The EAT Judge has given all the parties permission to appeal to the Court of Appeal on all points on which they lost.  Not only that, the Government is setting up a taskforce to assess the impact of the decision and is reviewing the EAT decision "as a matter of urgency".

“However employers across all sectors in Wales now need to re-assess their approach to holiday pay – and some may face difficult choices about how to resource these payments.”

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In 2012, the Supreme Court ruled that British Airways pilots should be paid not just their basic salary as holiday pay, but also additional payments they would have received whilst working, as long as they were "intrinsically linked to the performance of the tasks" which the pilots were required to carry out. This was in response to a ruling by the European Court of Justice (ECJ).

Following this line of argument outside the aviation sector, last year an Employment Tribunal ruled that regularly worked overtime should also be included in the calculation of the pay UK workers are entitled to when they take annual leave (Neal v Freightliner). Whilst troubling for employers, that decision was not binding and in fact goes against a 2004 ruling by the Court of Appeal that only overtime which is guaranteed by the employer is included in the calculation. Although that case was subsequently settled, a number of other cases had considered the same issue and the Employment Appeal Tribunal's ruling was published today. The EAT held that in light of the BA pilots' ruling, the 2004 case does not correctly implement the Working Time Directive and the Court of Appeal decision cannot be relied on by employers.

As well as overtime payments, the ruling also dealt with a number of other payments such as standby allowances, emergency callout payments and 'acting up' allowances. The question in each case will go back to whether the payment in question is 'intrinsically linked to the performance of tasks which [the worker] is required to carry out under his contract of employment and in respect of which a monetary amount, included in the calculation of his total remuneration, is provided."

The question now remains as to how far back claims by underpaid workers could go. If a worker is successful in establishing that there has been a series of deductions, some claims could go back as far as 1998, the date when the UK Working Time Regulations were introduced. However, one significant aspect of this case is the suggestion that, if the series of deductions has been punctuated by a gap of more than 3 months, the passage of time will have broken any series of underpayments. In other words, a break of more than 3 months between one period of an employee’s holiday and the next might be enough to break a series of underpayments. Further analysis of the judgments will be needed to establish what the detailed implications are for each business.

The employers in the EAT case, as well as the UK Government, had argued that it should not be for the courts to decide that the method of calculating holiday pay referred to in the Working Time Regulations 1998 does not comply with the EU Directive. It was argued that this is a matter for Parliament to amend laws to ensure certainty for employers. With the ruling from the EAT now published, however, it does not necessarily mean it is the end of the matter, as it could be further appealed to the Court of Appeal. Prior to the judgment, a spokesperson from BIS has suggested that it could even go back to the ECJ.

The case of Lock v British Gas Trading Ltd this summer looked at the related issue of whether commission payments fell to be included in holiday pay. The ECJ ruled that notional commission for the time not working should be included. The difficulty with that decision is that it left it to national courts to decide what reference period should be looked at when calculating the commission due. Mr Lock's case has now gone back to the Employment Tribunal in Leicester and that question will be determined, at least in his case, next year.

The Government estimates that one sixth of the 30.8 million people in work get paid overtime. That means that around five million workers could be entitled to more holiday pay.